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Italian, Spanish bond yields jump as Eurozone worries deepen

While the Greek tragedy continues to play out -- the country's Parliament will hold a confidence vote in the government later Friday -- the financial outlooks for Spain and Italy are worsening.

And those huge economies are far more important for the future of Europe than whatever happens to Greece.

Investors continued to demand higher yields on Spanish and Italian bonds on Friday, raising the grim prospect that those governments will be priced out of the debt market at some point.

The yield on 10-year Italian bonds jumped to 6.37%, up from 6.19% on Thursday and the highest since 1997. The yield has surged from 4% a year ago.

This is exactly what Eurozone leaders were trying to avoid when they announced their plan a week ago to expand their $600-billion rescue fund for member states and banks, hoping to stop the continent’s 2-year-old debt crisis from spreading.

The idea was to boost the firepower of the fund, known as the European Financial Stability Facility, to $1.4 trillion by leveraging it. The fund could then eventually guarantee bonds issued by deeply indebted countries, particularly Italy.

The goal: Bring down interest rates on those securities to levels the countries can afford by making investors more confident about buying them.

“Events continue to spiral beyond the control of European policymakers,” wrote Win Thin, a currency strategist at Brown Bros. Harriman in New York, in a note to clients. “Italian borrowing costs have continued to march upwards to new euro-era highs, with the 10-year quickly approaching the 7% level that many see as the point of no return.”

Spain also is being hit by fresh doubts about its creditworthiness. The yield on 10-year Spanish bonds rose to 5.58%, up from 5.50% on Thursday and the highest since early August. The yield on two-year Spanish debt jumped to 4.26% from 4.10% on Thursday.

European stock markets ended broadly lower for the day and the week, though share prices remain above their September lows. Italian stocks lost 2.7% on Friday and 7.8% for the week. The Spanish market fell 1.3% for the day and 6.8% for the week.

The euro currency is showing surprising strength in the face of all of this. The euro was at $1.378 on Friday, down 0.3% from Thursday but well above the recent low of $1.318 reached on Oct. 3.